‘Sky Europe’: BSkyB’s Lofty European Ambitions

Visitors enter the German headquarters of Sky Deutschland in Unterfoehring, Germany.

Bloomberg News

Welcome to “Sky Europe.” Possibly.

Folding Sky Deutschland AG and Sky Italia into British Sky Broadcasting Group PLC would create a European pay-television group, with around 20 million television subscribers across Austria, Germany, Italy and the U.K., making it one of the region’s biggest and one which would pack a powerful punch in sports programming.

But the move by the British broadcasting bastion of Rupert Murdoch’s empire—Murdoch-controlled Fox is BSkyB’s single biggest shareholder, at 39%—to try to consolidate 21st Century Fox’s European broadcasting assets by creating “Sky Europe” may not be a foregone conclusion. BSkyB acknowledged as much in its comment Monday confirming speculation about negotiations, which it said are at only a preliminary stage.

Among the bridges BSkyB will have to cross is convincing all its shareholders that spending around $14 billion on a deal with possibly modest cost savings and modest growth prospects is worth it when there is the risk of tough U.K. and European Union antitrust scrutiny.

Still, national barriers in the broadcasting and telecom sectors are under pressure as Brussels tries to maintain the momentum in enhancing Europe’s single market. That is helping to attract foreign investors, among them Mr. Murdoch’s rivals in the U.S. such as John Malone and Sumner Redstone.

Here are the three components of the would-be “Sky Europe”:

BSkyB

Sky Deutschland

Sky Italia

Market capitalization

$22 billion

$7.8 billion

n/a

Share price reaction Monday

-2.30%

6.30%

n/a

21st Century Fox stake

39%

57%

100%

Subscribers (March 31)

10.6 million (TV)

3.7 million (retail)

4.8 million

Total Customers (March 31)

15 million

4.0 million

n/a

Annual revenue (year to end-June 2013)

$12 billion

$2.2 billion

n/a

Average revenue per user (2013)

$947

$47

$58

Initial reaction from analysts to a possible deal has been mixed. Credit Suisse said the pros and cons look fairly balanced.

We highlight Sky Europe could achieve synergies in set top box infrastructure; new product development; acquisition of sports and movie rights; original commissioned content; and central costs.

In the short term, synergies are likely to be small, perhaps up to £300 million per annum within 3 years… with part of this value having to be paid to Sky Deutschland and Sky Italia shareholders in control premiums.

Italy is a challenging market… With Mediaset likely to remain a strong competitor for the foreseeable future, the Italian leg of Sky Europe is likely to remain the most problematic, in our view.

We do not see substantial synergies and it would not enhance BSkyB’s cash-flow capacity short-term.

On Europe’s stock markets Monday morning, investors marked down BSkyB stock and bid up Sky Deutschland’s despite the British company’s hopes it won’t, under Germany’s takeover code, have to make a sweetened bid to the German company’s other shareholders.

21st Century Fox was part of the same company as Wall Street Journal parent News Corp until June last year.